On February 1, when the finance minister presented the last budget of Central government’s present term, persons from all strata’s of the society expected the government to dole-out some freebies and benefits for themselves, before the government goes out to polls to seek another mandate.
While the budget speech of FM contained mention of very few income tax changes, giving an impression that not many changes have been made on income tax side. However, the fine print of Finance Bill makes it clear that the government has made substantial changes for tightening the income tax regime, plug-in loopholes in existing provisions, without any visible changes in tax rates or income tax slabs.
Reduction in corporate tax rates for small and medium enterprises having turnover upto Rs 250 crore: The small and medium size enterprises seem to have received some tax break, as benefit of reduced corporate income tax rate of 2 per cent has been extended to companies having turnover upto Rs 250 crore during FY 2016-17. Earlier, benefit of reduced corporate tax rate was applicable for companies having turnover upto Rs 50 crore.
Some benefits to start-ups and farm producer companies: Income tax holiday available for start-up companies having turnover upto Rs 25 crore, which was earlier available for start-ups incorporated upto 1 April 2019 has been extended by another two years, i.e. for start-ups incorporated upto March 31, 2021. Further, tax holiday earlier available to agriculture co-operative societies has been extended to Farm Producer Companies as well.
Benefits for senior citizens: Senior citizens are now allowed increased tax benefit upto Rs 50,000 in respect of interest from banks and post office savings (instead of Rs 10,000 earlier), deduction for medical insurance upto Rs 50,000 (instead of Rs 30,000 earlier) and deduction for medical treatment of specified diseases upto Rs 100,000 (instead of Rs 60,000/80,000 earlier). These benefits are expected to give substantial relief to senior citizens, who have to spend substantial amount on up keeping their health and medical requirements.
Not much relief for middle class taxpayers: The middle class and salaried taxpayers especially expected substantial relief from taxes, after their honest contribution to income taxes was widely acknowledged in the past by the government at the time of demonetisation. New standard deduction of Rs 40,000 is allowed to salaried taxpayers, but the benefit is effectively curtailed to Rs 5,800 since exemption in respect of transport allowance (Rs 19,200) and reimbursement of medical expenses (Rs 15,000) have been withdrawn. Though, this amendment will give relief to taxpayers from maintaining documentation towards their medical bills for claiming medical reimbursement — so this benefit may be seen on non-monetary terms.
Overall increase in income tax liability for taxpayers, due to increased healthcare and education cess: Erstwhile education and higher education cess of 3 per cent is now replaced by healthcare and education cess of 4 per cent, which would result in increase in income tax liability for majority of taxpayers (except those, to whome some benefit is given, as mentioned earlier).
Long Term Capital gains on listed equities now subject to income tax: In its own words, in order to encourage the manufacturing sector over financial sector, the government has withdrawn the exemption earlier granted on long term capital gains on listed equities. Such gains will now be taxed at the rate of 10 per cent without indexation benefits. However, profits earned by taxpayers upto 31 January has been grandfathered by the government, by making FMV as on 31 January as minimum cost base.
Enlarging scope of business presence for foreign companies in India in line with BEPS guidelines: In accordance with guidelines of OECD under base erosion and profit shifting (BEPS) Action Plans and MLIs signed by various countries, including India, scope of business presence of foreign entities operating though agents in India was sought to be enhanced, to bring income of such foreign entities to tax in India.
Vide, amendments to section 9, corresponding changes are made in Income tax provisions also, so that to plug any loopholes and make such changes applicable as per domestic tax laws also.
Deemed dividends brought within purview of dividend distribution tax at increased rate of 30 per cent: Income tax law presently provides for taxation of deemed dividends in certain cases of loan and advances by a private company to its shareholders or other related parties, to the extent of its accumulated profits. This provision have been subject to tax litigation in India and also collection of taxes in such cases from respective recipients of loans, etc. has been difficult. The government has now proposed that in such cases, responsibility will be on such company giving loans to pay income tax in form of DDT at higher rate of 30 per cent.
Another step towards E-assessments: As per its stated objective of minimising corruption in income tax department, the government has introduced a new provision for enabling e-assessment of income tax returns, with minimal personal interaction between taxpayer and tax officer. Rules in this regard, shall be notified later. However, it will be interesting and imperative to see implementation and mechanism of such system.
(The writer is managing partner, Nangia & Co LLP)